Okay. Good afternoon, everyone, and thank you for joining the Sidoti Company March 2025 Small Cap Conference. My name is Julio Romero, and I'm the Building Products and Industrials Analyst here at Sidoti Company. We're really pleased to be able to host Northwest Pipe Company. Their ticker is NWPX. With us today is Scott Montross, President and Chief Executive Officer, and Aaron Wilkins, Chief Financial Officer. This is going to be more so of a fireside chat format, but if you do have any questions, feel free to type them into the Q&A section at the bottom of your screen, and I'm more than happy to ask on your behalf if time permits. With that, Scott and Aaron, thanks so much for being here.
Thanks, Julio.
Thanks.
Yeah, absolutely. They save the best for last. That's for sure.
Yeah, that's right. I don't see any fireplace in the background, though, so I'm waiting for the fireplace.
All righty. Maybe we kick it off with just a brief overview of Northwest Pipe, what you guys do, particularly for folks listening who are a little less familiar with the story, and perhaps also highlight some of the main acquisitions completed over the course of 2020 and 2021 and the strategic rationale behind those.
Okay. Just a little bit starting off with the steel pressure pipe group. That really is the bedrock and what the company was built around, steel pressure pipe. We make engineered water transmission systems for the transmission of raw water to water treatment centers. It's really the high-pressure transmission of water through these engineered pipe systems that we do. We do pipe that's anywhere from 2 ft in diameter up to 13 ft in diameter. We have seven locations, or excuse me, six locations for the steel pressure pipe business across the country, all the way from the West Coast down into SLRC, Mexico, and over to Parkersburg, West Virginia. We also have a microtunneling division or group that's within steel pressure pipe that is for trenchless pipe applications. It's in St. Louis, Missouri. Generally, it's probably about 60%-65% of the company still.
A few years ago, or several years ago, it was 100% of the company, which leads us to what the other business segment is, is the precast products that we do. First, the precast products we do, we have a company called Geneva, three plants in Utah, one in Salt Lake, one in Orem, one in St. George. It's really precast infrastructure related to residential more than anything. We acquired that business in 2020, January, at about $41 million of top line they had. The acquisition price was about $48 million. As of the end of 2024, their top line was about $83 million in revenue. It’s more than doubled over that period of time.
The other part of the precast business we acquired in 2021, October, was ParkUSA with three locations in Texas, one in San Antonio, one outside of Dallas, and one in Houston. This is a business that's really a water control systems and an environmental solution system business that is basically we take those products, we put them in precast vaults, put them on one of our knuckle boom trucks that we have at the plants, take them to the job site, drop them into the ditch, and the contractor just hooks them up. Normally, the contractor's buying a precast vault, and they're having to install all of these things and sometimes multiple times before they get it right, which is more expensive and time-consuming for them.
The Park business is a little bit more of an equipment business, service business with more of a lean towards smart water because we actually have control systems that can go on all those products that can be monitored off-site via cell phone or things of that nature. Really, the business we were in total, if you go back to 2017, the entire company was $132 million in revenue and about $5 million of gross profit. In 2024, we ended the year at about $493 million of revenue and about $94 million of gross profit. A lot of growth there through precast and through consolidation that we also did in our steel pressure pipe business. That is a little bit of an overview, and I am sure there will be some questions around that.
Yep. 4 o'clock. Great rundown. Maybe staying on that point about the industry consolidation with regards to the SPP segment, if you could talk about the competitive dynamics and how they've changed over time, how many major players there are in the space compared to prior cycles, and how that has affected margins, pricing, and profitability for the remaining industry participants.
You go back to 2015, 2016, and 2017, there were five major players in that market. Really, you're talking about a market that's really about $650 million on an annualized basis. It is a market segment that is a pretty specialized market. What happened during that period of time is consolidation took place, and we were one of the consolidators where we bought one of our biggest competitors called Water Transmission Group, which at that point was owned by National Oilwell Varco. Actually, we bought it at such a great buy that we had a $20 million gain on bargain purchase with the acquisition, which is not something that normally happens. After five years of trying to wrestle that away from them, we finally got it away from them and got away at a really, really good price.
As we sit today, a good market for steel pressure pipe is in probably the high 160s, 170s of municipal work, 160,000-170,000 tons of demand. That is a pretty good-sized market. Where we sit right now in the steel pressure pipe business is there are three major competitors in that business. If you look at the dynamics with the three competitors, because it is in the hands of only three versus five, even with markets like in 2024, we were able to, in steel pressure pipe, put together a pretty good production, but at a small market because there is about 140,000 tons of, actually 135,000 tons of demand.
We came through the year with $338 million of revenue on steel pressure pipe and about a 19% gross margin, which if you would have taken a market several years ago and had it be about 135,000 tons, it would have been a disaster market. That consolidation has really kind of stabilized. Even in okay years like 2024 was, we do pretty well. In slow years like we saw, and I believe, Aaron, that was probably 2023, there was a slow demand year, about 97,000 tons only. We still came through the year with 12%-13% margins. Not great, but not negative margins like you used to see when things were really bad. The landscape has really changed. It has really stabilized the business.
We hope with the IIJA-funded work coming through, probably more starting heavier in 2026, that that market demand is going to move up more toward 200,000 tons. You start seeing margins with the steel pressure pipe business that really start with a two versus a one. We have seen that before, and we believe it is coming at us again.
Yeah. No, definitely interesting to watch there. IIJA, you have not necessarily seen much of that come through to your P&L as of yet.
No. No. In fact, we've only seen, we've been involved with two projects that have it attached to it. One of them, it was Eastern New Mexico Rural Water District that had IIJA funding to it. It wasn't a huge amount. It was like $30 million, $40 million. The one that's in California that comes from the San Joaquin River Delta that brings water down to Southern California called Sites Reservoir, that's just in the stages where it should start bidding on something this year. I believe that's got probably double what the Eastern New Mexico project had on it. There was some $44 billion, $46 billion set aside for it. It's earmarked for various projects, but a lot of these projects take a lot of time to get in play.
You've got an owner, a municipality that gets the funding promised to it and assigned to it. You have an engineer that's got to engineer the pipeline to get it in play. It has to be laid out the right way. You're dealing with all kinds of right-of-way issues and things like that. Finally, the municipalities will say, "I'm going to bid this out to a bunch of contractors." In our case, there are generally four, five, six major contractors that are always in play with these things. We're bidding to the contractors. You can see it's kind of a stretched-out situation. That's why it takes so long to get this stuff into the works. The last infrastructure project or infrastructure that was passed for us was like 2008, 2009. That didn't really start getting going until 2012.
It ramped through 2012, 2013, and started to peter out in 2014. There is kind of a long stretch with these infrastructure bills that are passed and getting that actually into planning and moving along. That is why we expect really 2026, 2027, 2028, maybe 2029 to be the center of it.
Really helpful there. Three years last time, more or less, maybe four years this time in terms of that kind of hitting on all cylinders, infrastructure funding flowing through, but this time around with less competitors. Just speak to the barriers to entry in the SPP business and how that business is relatively insulated from new entrants.
It is kind of interesting because it is a small business that has every steel pressure pipe plant we have has a fabrication facility in it. We are fabricating large connections, maybe four-way connections with pipe miter joints and things like that that the pipeline does not always go straight, right? It is curving, and it is connecting and branching off and things like that. You have got a pretty big fabrication piece of this stuff. As a result, there is a lot of tribal knowledge with being able to do that sort of thing. We have had people come into the business like Jindal, which is a big pipe company, and they are out of India, but they have steel assets in the United States.
They decided that they were going to take an API, which is basically an oil and gas transmission line plant, and start doing water transmission pipe out of it. Big difference because API, you're running thousands and thousands and thousands of feet of pipe, and you're shipping 50-car unit trains to a drop site so it can be installed right into the ditch. A lot different with steel pressure pipe, right? They're smaller projects. The testing requirements are all different. I think what we found out with the last cycle is when people get into it, they don't know what they don't know, and it becomes a little bit of a disaster for them. I think that's the big barrier of entry. Plus, it's become widely publicized that really this market is really a $650 million market.
It's pretty well self-contained that kind of grows with GDP, grows with government funding, state revolving funds, and EPA money into the state revolving funds. There's liquidated damages that go with these things if you mess them up, right? It doesn't take too much with dealing with large liquidated damage claims to convince somebody or a new company that they probably shouldn't be in this business because it's a lot different than oil and gas. Generally, what we see is oil and gas guys wanting to get into it, Julio. That's what we see. I think those are the big barriers of entry. You hear people talking about it every once in a while. Once they find out what the average-sized job is, an average-sized job, maybe, I don't know, 800 or 1,000 tons average.
That is not a lot of string and a pipe together, right? It is 100% different than what the API pipe business is.
Super helpful there. Thanks, Scott. Maybe moving to the precast segment, just if you could speak to demand trends within there, both within Geneva and within ParkUSA.
I'll start with Geneva because Geneva is mostly residential. Like I said a little while ago, Geneva has doubled in size since we've owned them. We've come through the COVID situation that was going on and all the issues with that and through the interest rate raises that were going on, Fed rates going up and interest rates going up. When we first got into this, we were really concerned that that business was going to slow down quite a bit, but we've never seen it slow down. It's continued to grow. I think one of the big advantages is those plants are in Utah, and the net migration into Utah is pretty significant. It's like 25,000 or 30,000 a year into Utah, which requires homes and places for people to live.
Quite frankly, Utah, I think, is rated one of at least the top two or three places in the country to live, that's the best place to live for quality of life. You can say that, "Man, you guys were really good getting into this," or "You kind of stumbled into it." It does not matter. We are in a really good market in Utah, and it continues to grow. The order book has remained steady at a really strong level for a long period of time. We continue to expand there. We have a plan to get that business on about $100 million by the end of 2026, a $100 million rate just for the Geneva facilities. Again, I will just reiterate, when we bought them in 2020, they were $41 million of top line. We continue to invest there. We are commissioning the Exact 2500 .
I was there last week for the commissioning and watching them make 60in reinforced concrete pipe in there. The Geneva business is residential business, and it is just continuing to be strong. Conversely, the Park business was weak for about a year and a half with, I think, much more that issue with interest rate raises that were going on, and it is slowing some of the owners down and what they were doing. We saw a pretty slow business there for the last year and a half. That being said, they are about the same size last year as when we bought them, but they had gone up to about $84 million-$85 million, maybe $87 million the previous year. I cannot remember exactly what it was. We bought them, they were like $72 million or $73 million of top line.
That business was a little slow as we progressed through the last year and a half. What we have seen is a pretty substantial surge in their order book in the last December. The order book was, God, I do not remember how much higher it was, 25% or 30% higher than it was in the previous quarter. What we refer to with really the non-resi business, because Park is non-residential, institutional, and commercial, mainly commercial, is we refer to the Dodge Momentum Index, which if you look at the end of December, the Momentum Index was 19% higher than it was the previous year and end of 2023, but the commercial side was 30% higher. I think the commercial side is people are starting to get used to the interest rates.
Obviously, we've been in a long period of low interest rates in this country, and they're starting to kind of settle in a little bit. If you get maybe 150 basis points of drop in the interest rates, I think you can see some real, real boom on both the residential and non-residential side. We are expecting a big 2025 from the non-residential side of the business this year. As we do Geneva, we have a plan to have the Park business on a $100 million rate by the time we get to the end of 2026 too. They are both looking like they are in pretty good shape. We are expecting a pretty strong 2025.
Excellent. I love the timing of this presentation because I think you just made some news right now with the press release I just saw across the tape about your reinforced concrete pipe facility in Salt Lake. If you could just talk about that, I guess that's officially completed and up and running.
Yeah. We were actually down there watching it make 60-inch RCP last week, and I think it was Wednesday and Thursday last week. It is complete, brand new building, brand new facility. The old facility is likely going to be decommissioned here within the next year. That took probably 12 or 14 people to run that facility. The new facility is going to take five. The amount of productivity we are going to get out of that is just going to help us more get to the $100 million quicker.
We are going to continue to invest in things like that there as long as the number is paying out. We have got another investment this year there that is going in that probably will not be completed until beginning of 2026. It is another market expansion for a different product there that is going to continue to help us grow that business. Yeah. We're pretty happy with that.
That is in Utah as well, or?
Yes. Yes. The Exact 2500 is at the Salt Lake City facility. The new investment's going to be happening, and we'll press release that at some point. It's going to be happening at the Orem, Utah facility, which is about 45 minutes away to an hour away from Salt Lake City.
Excellent. In terms of the Salt Lake just completed facility, just a quick refresher on total dollar investment and kind of expected payback period.
Yeah. The total dollar, and remember, this is a replacement too. We had to replace the old one. It is an investment facility by necessity at that point. Total dollars invested was about $16.5 million in the equipment and about $5 million in the building. The building was about $5 million. It is a brand new building, brand new equipment. Payback period is probably, what, four years or so at this point until we get this thing ramped up. We're only running one shift right now. The ability to run more than one shift is pretty strong with that facility at both Salt Lake City with the new Exact 2500 , and then the new equipment we'll be putting in Orem. With those two investments, that's the pathway to $100 million for us.
Excellent. Just quick, what's the lifespan of one of those facilities expected to be?
Oh, God. Forty years. It better be thirty or forty years. It better be well after I'm dead. Otherwise, it's going to be a problem.
We'll see which one goes out first. Okay. Fair enough.
Okay.
Just turning to Park, right? Where are you in terms of the—that was a heavy lift when you bought it in terms of kind of getting the inventory where it should be in terms of inventory management, cycle counting, cycle counting. Just where are you in terms of ERP implementation and kind of what inning would you say you're in?
Yeah. I'd say we're probably in the seventh inning. I think all the core functionality of that system is in play. I think we have some gains, some kind of continuous improvement that we'll always be striving to make. I'll probably never tell you we're in the ninth inning. I wouldn't even tell you that on the SPP side, to be honest with you. We're always looking for ways to automate our systems and improve our performance. Right now, I think our concentration is now shifting from functionality to information and data gathering, getting ourselves better data, getting ourselves more used to seeing the data and working with the data, and then getting good cost information out of the new system.
When we initially brought that on, we did not have really any information to work from, so we really had to kind of develop all that. A lot of that lack of information was cause for a material weakness in our internal controls, which has since been remediated. Happy to have all that past us and now really kind of focus on enhancement.
Excellent. That's very good to hear. Would you say it's kind of ready to be spread to new potential M&A targets in the future? When I say spread, using the smart water products and putting them in potential acquired precast concrete facilities.
We booked about $12 million or, excuse me, about $10 million worth of work outside of the state of Texas, which was the first phase of level one product spread. About $2.2 million of that, $2.2-$2.3 million, was at the Geneva facilities. So Geneva is doing in the area of about almost $2.5 million right now. The goal for Geneva next year or this year is to be over $3 million worth of that. The goal after that, we think we can get Geneva up to $5 million,$6 million or $7 million of product spread before we start tapping out with the ability to do it. I mean, you're looking at a lot of projects that have got values that are anywhere from $25,000 or $30,000 up to maybe $150,000.
That is a lot of work on Park products through there. We think that that works that way pretty well. We have also taken the manholes that we—the manhole production that we have done in that we do in Geneva, and we are spreading that to the Park plants, and they are starting to do manholes down there for the Texas market, something that they have never done before. It is going the opposite way too. The other thing we are doing is we are going to ultimately spread products to pretty much as far as we can go as long as there is a market for them. The other thing that we are doing this year is we are spreading precast products to some of our other steel pressure pipe plants.
We are going to be setting up to do precast, or we are setting up to do precast as we speak in our Portland facility. We've got a huge bay there that used to be for ship repair during World War II that we're going to set up in there and do some precast products out of there. We're also going to be doing more precast products out of Tracy, California, which already has precast capabilities, but we've got to enhance those precast capabilities a little bit more via the acquisition of some new forms for some of the products that we're going to make.
I would say that ultimately, any precast business that we buy like Geneva, as long as it's got a market for park products, is going to have those park products spread to that business as an additional product that they can do versus they're probably already making the vaults for projects for the contractor. We intend to, if we're making the vault, we want to be putting the equipment in the vault and obviously upselling that, putting it on a knuckle boom truck, taking it to the job site, dropping it in the ditch, and all the contractors got to do is hook it up. That is a lot easier for them and a lot less man hours for them. It just makes sense to keep spreading that across the country wherever we get a new place.
That's very interesting because Tracy was—when you bought Tracy, the Ameron, I think, acquisition, that came with reinforced concrete pipe, and that was kind of the adjacency that you—when you moved into precast, that's how it tied it all together. This kind of brings it full circle.
Yep.
Very interesting.
Yeah.
Okay. I want to get to the crux of at least how I see the story, which is the free cash flow consistency and what you're doing on that side. Can you discuss some of the drivers of the free cash flow improvement you've seen over the years, including kind of aligning management compensation to free cash flow and pursuing improved contract terms in SPP?
I think the biggest thing, the biggest thing that we saw or opportunity that we saw was the amount of cash that was always tied up in the SPP business, right? Because these are long lead projects, right? It's a thing where you're producing a project sometimes in advance so that you can keep up with the contractors when they start putting the pipe in the ditch. It just tied up a lot of cash for a long period of time. The idea was that we had to figure out how to mine some of the cash out of the steel pressure pipe current assets, especially the contract assets that we have on the balance sheet.
We did that by making the free cash flow generation part of management's variable compensation, senior management's variable compensation, which is probably the quickest way to create behavior and to continue behavior going forward because that stays. Last year, our goal was about $22 million of free cash flow. We actually hit $34 million of free cash flow. This year, the goal is $30 million, with the stretch goal being well above $30 million. We are going to continue to create that behavior and make sure that we are incenting people the right way to drive improvements in the business. That pays down the credit facility faster, creates a better look with our cash flow, which I think is important to a lot of shareholders. Paying the credit facility down faster allows us to invest faster, not only in organic growth, but also in M&A.
That is where we want to be. We are relatively conservative with the amount of debt that we have here, Aaron and I both. Ultimately, getting out of that credit facility and getting cash to the balance sheet sure makes it a lot easier to do M&A transactions than when you are looking at, "Oh my God, how is this going to affect things as we go forward? What is the interest expense going to look like?" Things like that.
I think you hit the nail on the head. I think putting it to our team through their incentive compensation has really directed a lot of attention to it. We talk about it all the time. What we saw in 2024 was it pained evidence. We will obviously keep on that and keep pressing forward with higher targets for everybody to achieve.
Excellent. That is really exciting to see free cash flow inflect in 2024 without even ParkUSA hitting on all cylinders with just an okay bidding year. I think there are still some other levers to improve free cash flow once those get going. I guess, how would you characterize the longer-term free cash flow conversion to net income goal in your own words?
I'll let Aaron answer that after. My goal is to try to have free cash flow at least match the EPS, right, for sure. We were exactly right on that this year. $3.40 of EPS, $3.40 of free cash flow. I think that's pretty indicative of a good quality of earnings. You're showing a dollar of earnings, and you're getting a dollar of cash for that, right? That is going to continue to be the focus. He probably should make some comments.
Maybe longer-term, since Scott covered kind of that near-term sort of focus. I think the idea is obviously to control our cash conversion cycle through broader acquisition and broader investment into precast, right, which has a shorter conversion cycle. What that'll do is balance things off and get things to where we're kind of on the other side of the working capital coin and actually generating a little bit of cash from working capital on a more normal basis and not see as much of a dependency on what we're now is in excess of about 60% of our business being steel pressure pipe focus. We can get that kind of rounded off a little bit. We'll see better cash flows.
Absolutely. We're just about done of time here, but I was hoping you could kind of sum up what aspects of the Northwest Pipe story are often overlooked and any key messages you want folks to take away from today.
I think what's been built over the last several years is a company that's significantly more resilient than we've ever had before, right? We've changed the product groupings and what we're involved in. We've done things to improve the cash cycle, right? We face headwinds. Everybody talks about tariffs. Guess what? Tariffs mean higher steel prices, and high steel prices are really good for us, right? More gross profit dollars driven by higher steel prices for us. That's a good thing. You have a few things to work around, but we've always had headwinds. The important thing is now we have resiliency to be able to deal with them. We're focused on creating behaviors in the company that are beneficial for not only the shareholders, but for driving M&A and for driving further investment in the business so we can continue to grow.
We're focused on getting this to a billion-dollar company in the next several years here. That's a big thing. Once we get to that point, I think it changes the narrative on—I always say the road from half a billion to a billion is a long, winding, arduous road. When you get that kind of scale, the road from $1 billion to $2 billion, because of what you can actually do, gets significantly shorter. I think we've got a lot of good headwinds in front of us with IIJA funding. We've got some—did I say headwinds? We've got a lot of tailwinds in front of us with the IIJA funding, but it's because of the amount of stuff, the amount of projects that are going to be coming through the system. That's really exciting.
We see a lot of growth in front of us with precast based on what the indicators are giving us and what the order books are doing. We are positioned pretty well to continue to grow this company. M&A is active now. We are more active than we've been to continue to grow this business on the precast side. I think we've got a lot of good road in front of us.
Excellent. Scott, Aaron, thanks so much for taking the time. Thanks to everybody at Northwest Pipe and at the Addo team. Really appreciate you all taking the time today.
Thank you.
Thanks, Julio. Appreciate it. Take care.
See you.